Commentary: Sea of debt, high productivity undermined job growth

The U.S. economy is much stronger than it would have been without it, and millions more Americans have jobs because of it. That’s hard to dispute.

However, the fiscal stimulus passed by the Democrats in early 2009 probably didn’t deliver as many jobs per dollar spent as hoped by its planners. And the stimulus plan is wildly unpopular with the public, most of whom view the $800 billion stimulus package as wasteful at best.

The perceived failure of the stimulus is a big reason why the Democrats are expected to lose control of the House in next week’s election. President Barack Obama and the Democrats haven’t been able to adequately explain how the stimulus worked, while the Republicans waged a relentless and successful campaign to discredit the plan.

Skepticism and smears

Skepticism about the stimulus is understandable. After all, there are still 14.8 million people looking for work, and millions more who’ve given up looking or have been forced into a part-time job. The official unemployment rate sits at 9.6%, compared with 8.2% when the stimulus bill was passed in February 2009.

Republican leaders, such as Rep. John Boehner of Ohio, say the stimulus hasn’t created any jobs at all, but that’s plainly silly. Okun’s Law of economics says if you push hundreds of millions of dollars into the economy, you’re going to create millions of jobs.

Independent analysts at the Congressional Budget Office and in the private sector roughly estimate that the stimulus boosted the level of gross domestic product by about $400 billion this year and raised the level of employment by about 3.3 million.

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Of course, it’s impossible to know precisely how many jobs are due to the stimulus spending, because so many of the jobs are the result of secondary effects of the stimulus. We know it’s not zero.

For instance, we know that stimulus grants to the states kept several hundred thousand people working as teachers, police officers, fire fighters and nurses. These are real people receiving real paychecks for doing important work, despite the Republicans’ smears that the grants amounted to a union bailout of lazy bureaucrats.

We know that $100 billion is being spent on thousands of infrastructure projects around the nation, employing lots of construction workers doing everything from filling potholes and fixing sewers to building world-class high-speed rail, wind farms and solar-energy projects.

We know that almost every working American gets a tax cut with every paycheck. In total, taxes have been cut by about $245 billion, much of which has been spent, circulating through the economy and creating more jobs and income. We know that, in addition, millions of unemployed people got weekly benefit checks. Their spending helped us keep our jobs.

The fiscal stimulus certainly created or saved millions of jobs, but did it create as many as predicted? Maybe not.

The estimates from the White House and the CBO are based on historical relationships. However, the economy of today may not look exactly like the economy of the past. The behavior of consumers and businesses was different this time.

The biggest difference is the nature of the financial crisis the nation faced. Consumers and banks were highly leveraged, and still have too much debt on their books three years after the crisis began. Deleveraging takes years.

Still reeling from recession

Because of their debt, it’s quite likely that middle-class consumers didn’t have the same marginal propensity to consume as before; that is, they were more likely to take an extra dollar of income (from a tax cut, for instance) and save it or use it to pay down their debts, rather than spend it. The level of personal savings has risen to 5.8% of disposable incomes from about 5.4% in the first quarter of 2009 (and 1.4% in 2005). Consumer debts have actually declined for the first time in more than 60 years.

Higher savings meant less of the stimulus was spent, and therefore it had less impact than hoped.

Businesses are also more cautious. During the depths of the recession in early 2009, they slashed workers’ hours even more than mandated by the decline in output. The result was the fastest increase in productivity in 50 years, and was all the more amazing because it happened during a recession.

Rising productivity meant that it took fewer hours of labor than expected to produce an extra dollar of GDP. Accordingly, the stimulus wasn’t as effective as planned.

Larry Summers, who was Obama’s top economic adviser, noticed this pattern soon after the stimulus went into effect: “The unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP,” he said in July 2009. The job losses were heavier than Summers and the other advisers thought when they were planning the stimulus.

And remember, Obama’s advisers proposed a stimulus smaller than what they thought was needed, as they caved to political pressure to keep the size down.

The unusual nature of this recession and our response to it meant that fiscal stimulus delivered less bang per buck than expected from past results. But that doesn’t mean it didn’t deliver any bang at all.

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